In 2024, these nations, known to rich world investors as “frontier markets”, will have to repay about US$200bil in bonds and other loans. — Bloomberg
NEW YORK: At Manhattan’s luxe Pierre hotel on a late September morning, Adebayo Olawale Edun, the finance minister of Nigeria, tried to soothe the jitters of Wall Street bankers.
Over croissants and orange juice, he pledged that his country would cut spending and collect more in taxes to make the crushing debt payments owed to foreign investors.
For Edun, a former investment banker and World Bank economist, it could hardly have been a more important audience – a presentation sponsored by Citigroup Inc, one of the world’s biggest underwriters of international bonds.
Tucked inside the materials distributed to the crowd, one item suggested the challenge of his task, according to people who were there but requested anonymity to discuss a private meeting.
The document showed that Nigeria’s 2022 debt payments, the equivalent of US$7.5bil, surpassed its revenue by US$900mil. In other words, it had been borrowing more just to keep paying what it already owed.
A debt crisis is brewing across the developing world as a decade of borrowing catches up with the world’s poorest countries. In 2024, these nations, known to rich world investors as “frontier markets”, will have to repay about US$200bil in bonds and other loans.
The bonds issued by Bolivia, Ethiopia, Tunisia and a dozen other countries are either already in default or are trading at levels that suggest investors are bracing for them to miss payments.
The situation is especially grave because these nations have small domestic markets and must turn to global lenders for cash to spend on hospitals, roads, schools and other vital services.
As the Federal Reserve vows to keep US interest rates higher for longer, a once-ebullient market for debt from those countries is drying up, cutting them off from more borrowing and adding to the many rate-related risks of 2024.
“The punch bowl has been taken away,” said Sonja Gibbs, a managing director of the Institute of International Finance, which represents private and central banks, investment managers, insurers and others in the industry.
“Global rates are considerably higher, and the incentive to invest in these markets is challenging when you can get 4% or 5% in US treasuries.”
A series of global shocks sparked the crisis. During the Covid-19 pandemic, rich nations printed money to hand out stimulus checks. Poor nations had to borrow to keep their economies running.
The easy-money policies in the wealthy world meant that investors were happy to lend in search of higher rates.
Then, poor countries faced higher food import costs caused by the Russia-Ukraine war, combined with a global spike in inflation.
The timing could hardly have been worse. Including government, corporate and household borrowing, the debt of the 42 countries the Institute of International Finance classifies as frontier markets reached US$3.5 trillion in 2023, a record and about twice as much as a decade ago.
To stay solvent, many of these governments are slashing spending as debt payments consume their budgets.
Already, some 3.3 billion people, or about half of the world’s population, are living in countries that spend more on debt payments than on education and health care, according to the United Nations Conference on Trade and Development.
In places such as Gabon, where President Ali Bongo Ondimba was unseated in a coup in August, tight budgets are leading to political upheaval.
“If this were the developed world, we’d already be calling it a debt crisis,” said Penelope Hawkins, a senior economist at the UN trade agency.
Diverting resources
“Right now, developing countries are diverting the resources that are needed for development to service their debt.”
Investors in frontier nations’ debt and equity are bracing for pain. Some of the biggest holders are funds managed by BlackRock, Franklin Templeton and T. Rowe Price Group.
“This is the worst crisis in the last 30 years for these countries,” said Mattias Martinsson, partner and chief investment officer at Sweden’s Tundra Fonder AB, which manages equity funds dedicated to frontier markets.
“These markets are not constructed in a way that they can manage these eurobond issuances in cycles like these,” he said.
After the Pierre presentation, the Nigerian finance minister had a one-on-one meeting with Citigroup vice-chairman Jay Collins. Edun dutifully took notes as the American executive spoke.
Edun had just informed US investors that Nigeria had access to the World Bank for a loan, which would mean taking on US$1.5bil more in debt but also affording more breathing room.
In an interview afterwards, Edun suggested that foreign direct investment and remittances from families living abroad could return and stabilise the nation’s currency, the naira.
But the country was still struggling. The naira had plunged in a free fall, and inflation surged to an 18-year high as the government started to scrap a popular but costly fuel subsidy.
Investors that month demanded an extra 7.6 percentage points over similar US treasuries to hold debt from Nigeria, according to data from JPMorgan Chase and Co.
President Bola Ahmed Tinubu said in late November that budget cuts would reduce the government’s deficit and help it keep servicing debt.
Nigeria, an Organisation of Petroleum Exporting Countries member that’s produced oil since the late 1950s, may muddle through and keep Wall Street at bay.
In the 2010s, investors started showing enthusiasm for frontier bonds, reflecting a thirst for higher-yielding securities.
The countries might have been poor, but they had low debt-to-gross domestic product ratios, which are a standard measure of a country’s financial health.
Citigroup’s then-chief executive officer (CEO) Vikram Pandit and JPMorgan CEO Jamie Dimon both toured Africa in 2010, talking up the opportunities there.
“Africa has a major role to play in this new world,” Pandit told reporters in Johannesburg.
Dimon said he was “incredibly impressed” by the opportunities on the continent after visiting South Africa with former British Prime Minister Tony Blair, an adviser to the bank.
Later that year, Olusegun Olutoyin Aganga, then Nigeria’s finance minister, led a multi-city roadshow in Europe as well as New York to drum up support for the nation’s US$500mil eurobond.
Buyers from Europe, the United States, Asia and Africa bid for part of the deal. By the time it was placed in early 2011, bankers had received orders equal to more than twice the amount of debt sold.
The bond yielded 7%, about 3.5 percentage points more than similar treasuries at the time.
Over the next decade, African countries borrowed heavily. Debt rose 250% to US$645bil, according to One, an antipoverty charity founded by U2 singer Bono that’s pushed for relief from repayment.
Frontier countries are also in hock to China. The country loaned tens of billions of dollars to African nations, often through bilateral deals or state banks, which offered credit for infrastructure projects.
China is increasingly competing with multilateral lenders, such as the International Monetary Fund (IMF), to provide bailouts to distressed countries.
As of the end of 2021, China had doled out 128 rescue loans worth US$240bil, according to a study based on statistics from AidData, an institute housed at William and Mary University, a public research university in Virginia.
Exposed risks
That type of lending from China was rare a decade earlier, the study found.
Now, rising interest rates and inflation have exposed risks across frontier markets. Bolivia’s notes have lost more than a third of their value in 2023, while debt from Ecuador has also fallen by double digits.
This week, Ethiopia said it would miss an interest payment that was due on Monday because of the nation’s “fragile external position”.
Like its peers, the nation had been effectively locked out of markets.
No sub-Saharan African country has issued a eurobond since April 2022, the IMF said in its October outlook.
Some investors, seeing an opportunity, are scouring the world for countries where the market is overstating the risk of default. The value of El Salvador’s bonds will have more than doubled in 2023.
“There is a clear distinction between the ones that find access to markets easier and those that find access to markets harder,” said Philip Fielding, a money manager at MacKay Shields, a unit of New York Life Insurance Co.
These days, Aganga, the former finance minister, has a more sceptical view of owing money to foreign countries.
“The global financial system is, as Africans would say, biased toward the United States,” he said.
Aganga recalls, wistfully, the days when Wall Street couldn’t get enough of poor countries’ debt.
“Now everything is the reverse,” he said. “Inflation and interest rates are high globally, and frontier markets, especially those in Africa, are suffering.” — Bloomberg
